What is Direct Cost?
A direct cost is any cost related to the production method of a good or service. It is the opposite of an indirect cost.
How Does Direct Cost Work?
Direct costs are variable costs associated with the inputs and labor required to produce a good or service. For instance, two direct costs associated with producing a copper pipe are the cost of the raw copper and the wages paid to the worker molding the copper into the shape of a pipe. Direct costs should not be confused with indirect costs, which are fixed costs unrelated to inputs and labor.
Why Does Direct Cost Matter?
The variable nature of direct costs causes them to rise and fall proportional to increases and decreases in output.